value and opportunity

InterActice Corp (IAC) is a company I had on my list for a long time but for whatever reason I never managed to look at them in more detail. Over the past few weeks I read in several quarterly reports of good funds that they had invested, so I decided to look at least a little bit deeper this time.

Founder/ Chairman Barry Diller

InterActive is the creation of Barry Diller, who is now 78 Years old. He had a very interesting career. As a media executive, among other things, he created Fox Network, and mentored media executives such as Michael Eisner (ex CEO of Disney).

He took control of IAC in 1995 and finally bought out “Cable Cowboy”  John Malone in 2010. The relationship with Malone was long but not always without issues.

Some years ago there seemed to be an issue with excessive travel expenses, but other than that he seems to have a very good reputation. although his aggressiveness earned him the nickname “Killer Diller”. His last victim was Expedia CEO Okerstrom whom he kicked out in late 2019.

A dilly of a deal (or two) for Barry Diller …

IAC business model ( history)

IAC is a holding & investment company that usually buys majority stakes in online related companies, preferably market places, develops them over some time and then often spins the companies out to shareholders as exit.

The history of IAC contains a lot of deals, initially in the media sector, but soon branching out into online business models such as Ticket Master, City Search. Lending Tree, Trip Advisor and a couple of online travel businesses.

These online travel businesses were spun-off into Expedia. As his mentor John Malone, Barry Diller likes spin-off very much,

In 2005, we completed the separation of our travel and travel‑related businesses and investments into an independent public company called Expedia, Inc. (now known as Expedia Group, Inc.). In 2008, we separated into five independent, publicly traded companies: IAC, HSN, Inc. (now part of Qurate Retail, Inc.), Interval Leisure Group, Inc. (now part of Marriott Vacations Worldwide Corporation), Ticketmaster (now part of Live Nation, Inc.) and Tree.com, Inc.

The latest and most successful spin-off just happened with MAtch.com.

Past performance:

Looking at the stock price until the Match.com spin-off, one can easily see that especially from 2016 on, IAC did really well and Covid-19 was only  short “blip”:

Unfortunately I didn’t find anywhere a full performance calculation for IAC including all splits and spin-offs, but I guess someone who bought in 1995 and kept the shares will be a VERY happy investor.

The match.com spin-off

Interestingly enough, the Match.com spin-off was not a “pure” spin-off as IAC kept some shares that they then sold for cash:

When the transaction closed, IAC holders received one IAC common share and 2.1584 Match Group common shares for each IAC share they held prior to the transaction.

In addition, IAC received $838 million cash, representing $3 a share of Match Group common IAC previously held and the aggregate cash consideration not elected by Match Group public shareholders.

IAC said it expects to receive an additional $1.4 billion of proceeds from the sale of Match common shares. That’s expected to close Wednesday.

Match .com has an interesting story itself and was bought in 1999 by IAC at “only” 50 mn USD, so with a value of around USD 25 bn at the time of the separation, that makes it a 500 bagger for Diller and IAC shareholders over ~20 years. Match.com is clearly profiting from Covid-19 but clearly an impressive value creation story.

CEO Joey Levin

Levin became CEO in 2015. He joined IAC in 2003 and held various jobs before being promoted to CEO. In his early 40s, he is clearly the “Next generation” for IAC. What I have heard and seen from him, he sounds like a very “matter of fact” and down to earth guy with a lot of operating experience. 

Incentive wise, according to this article, he owns 35 mn USD in IAC stock and never sold. He received a total salary of around 15 mn USD in 2019, however I do not know hope much of that was in stock. So although he is no owner-operator, he seems to be relatively well aligned with shareholders.

Sum-of-the parts-valuation (SOTP):

Overhead cost: In a SOTP, corporate overhead need to be deducted. For IAC, corporate overhead is quite volatile, somewhere between 40-80 mn USD a quarter. For valuation purposes, I will use 45 mn USD per quarter or 180 mn USD annually. As a very simple assumption, I will simply deduct 5x annual overhead from the SOTP valuation, which equates 900 mn USD.

This is my attempt on the SOTP (as of August 21):

	Share price	Market cap	IAC share	MV IAC bn	Comment
ANGI	14.1	6.99	83%	5.80
MGM Ressorts	20.9	10.31	12%	1.24
Cash ofter Spin off				2.90	After MGM purchase
Total listed/cash				9.94
unlisted
Vimeo		2.0	98%	1.96	Corona WInner
Dotdash		0.5	100%	0.50	Marketing
Search		0.25	100%	0.25	Covid-19 loser
Turo		0.1	100%	0.10	Covid-19 loser
Care.com		0.5	100%	0.50	Take over valuation
Overhead				-0.90	5x annual overhead
Total Value				12.35
IAC	127	11.44		11.44	84.3 mn shares plus 5.8 mn options
“Upside” to NAV				7.92%

According to my numbers, the “discount” is actually quite low, so in itself, IAC dos not look like a direct bargain at the moment.

A quick look at ANGI

ANGI is a combination of 2 IAC portfolio companies: Home Advisor and Angi’s list. It is a market place for home improvement professionals looking for contracts from homeowners. The market place is the clear number one in the US and profitable with adjusted EBITDA margins of around 10%.

Q1 2020 was OK with 13% growth yoy, in Q2, yoy growth declined to 9% which is still quite OK and maybe due to the overall home improvement trend during the lock down.

Looking at the stock chart we can see that ANGI was at first hit hard but now trades like a “Corona Winner” above the prices from the beginning of the year:

Personally, I am not sure if the current home improvement craze is a long term change or just a short term blip. I think ANGI is an interesting company, but at the current valuation of around 7 bn, I do not see a large undervaluation. Or to say it in other words: i am not sure if I would want to own it outright. However as this makes up 50% of IACs’s value this should be a prerequisite.

ANGi interestingly has a German listed subsidiary called “MyHammer” which I covered briefly in February. MyHammer did well in Q1 but has not released the “Covid” numbers yet. However like ANGI, the share price is 20% higher than it was pre-Covid-19. 

The MGM Deal

The MGM deal is interesting. First, it is a minority position and second, casino’s don’t look that much “online”. However they well explain that the actual bet is on online sports betting. Interestingly Joey Levin also justifies it as a value investment as a SOTP case. In order not to overload this post, I will look at MGM in a separate post.

Pros/Cons:

As always a quick summary at this stage on what I think are pros/cons of IAC:

Pro’s:

+ experienced management with very good track record and ownership
+ long term approach if required and not afraid to make counter-cyclical moves
+ very good investor communication
+ successor for founder already in place 
+ from the outside, corporate culture looks good (decentralized decision making, long term focus etc.)

Cons:

• Diller is quite old (78) and successor needs to further prove himself
• past performance relies on a few very good deals
• MGM deal does not really fit (minority stake)
• some assets hit badly (Turo)
• SOTP doesn’t show big discount and ANGI which makes up 50% of the value would not be an outright buy

Summary:

Overall, I do like IAC a lot, but I think I am maybe 1 or 2 years too late to the party. It doesn’t look like an attractive SOTP case and I do not know if the current portfolio holds another Match.com. Their largest stake is ANGI, a company I would not invest into outright.

So as a result, I will not invest at IAC right now. I will keep them on my watch list and hopefully update the SOTP on a regular basis. If the discount would be 25% or more, I might start a position then.